For most seniors, Social Security income is a necessity. Based on more than two decades of annual surveys by national pollster Gallup, anywhere from 80% to 90% of retired respondents lean on their Social Security benefit in at least some capacity to make ends meet.
Given how important Social Security is to the financial well-being of older Americans, there's, arguably, no event more anticipated than the unveiling of the annual cost-of-living adjustment (COLA), which is right around the corner.
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What is Social Security's COLA, and when will it be announced?
Social Security's COLA is a mechanism designed to help beneficiaries keep pace with the inflation they're contending with. For instance, if the price seniors pay for a basket of goods and services rises from one year to the next, Social Security checks should increase by a commensurate amount to avoid a loss of purchasing power. COLA is that tool tasked with ensuring this balance.
Prior to 1975, the program's COLAs were completely arbitrary and passed along by special sessions of Congress. Since 1975, annual COLA calculations have been made using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W is an inflationary index with over a half-dozen major spending categories and dozens upon dozens of subcategories, all of which have respective weightings. These weightings are what allow the CPI-W to be boiled down to a single figure, which makes for easy month-to-month or year-over-year comparisons.
While the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), only readings from the third quarter (July through September) factor into the cost-of-living adjustment calculation. The average CPI-W reading from the third quarter (Q3) of the current year is compared to the average CPI-W reading from Q3 of the prior year. If the current-year reading is higher, it means inflation has taken place and beneficiaries are in line for a higher monthly benefit in the upcoming year. The magnitude of the increase in benefits is simply the percentage difference between the two average Q3 CPI-W readings, rounded to the nearest tenth of a percent.
Thus far, two of the three pertinent figures have been announced -- the July and August CPI-W readings. The BLS September inflation report, which is slated to be released on Thursday, Oct. 12, 2023, at 08:30 a.m., ET, will provide the final puzzle piece needed to calculate and announce Social Security's COLA. In other words, the big reveal is just 11 days away.
A more than 40-year high for the U.S. inflation rate in 2022 led to a historic Social Security COLA this year. US Inflation Rate data by YCharts.
An above-average cost-of-living adjustment is expected
In 2023, Social Security's more than 66 million beneficiaries enjoyed a historic increase in their monthly payout. The 8.7% COLA passed along this year is the highest on a percentage basis in 41 years, and the largest ever on a nominal-dollar basis. The average retired worker saw their benefit rise by $146 per month.
Suffice it to say, the 2024 Social Security COLA won't be as impactful on retirees' pocketbooks -- but it should still come in above average.
Following the release of the August inflation report from the BLS, senior Social Security policy analyst Mary Johnson of The Senior Citizens League (TSCL) forecast a COLA of 3.2% for the upcoming year. That compares to an average COLA of 2.6% over the trailing 20-year period.
The two factors behind this above-average cost-of-living adjustment look to be energy and shelter expenses. Last week, the spot price for crude oil hit its highest level of the year. This typically leads to higher prices at the fuel pumps.
Meanwhile, shelter is the largest weighted core expense -- core inflation excludes volatile energy and food costs from the equation. With 30-year mortgage rates tipping the scales in some regions at 8%, existing home sales have cratered. At the same time, landlords are working with exceptional rental pricing power. Unsurprisingly, shelter expenses are up 7.3% on an unadjusted 12-month basis for the Consumer Price Index for All Urban Consumers (CPI-U), which is an inflationary index similar to the CPI-W.
Assuming TSCL's forecast is accurate, a 3.2% COLA would translate into a roughly $59-per-month benefit increase for the average retired worker come January. As for workers with disabilities and survivor beneficiaries, their average monthly payout would be expected to climb by $48 and $47, respectively, in 2024.
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Unfortunately, an above-average COLA will still lead to disappointment for many
Given that there have been three instances over the past 15 years where no COLA was passed along (i.e., deflation occurred), a COLA north of 3% will make at least some beneficiaries happy. Chances are, though, many retirees are going to be disappointed, one way or another.
One of the biggest issues with Social Security's annual COLA is that, over long periods, it's done a poor job of keeping up with the inflation that matters to senior citizens. This problem can be traced to the CPI-W.
Don't get me wrong, an annual COLA is much better than the completely arbitrary COLAs passed along by Congress between 1950 and 1974. However, as the full name of the CPI-W states, it's an inflationary index focused on the spending habits of "urban wage earners and clerical workers." These are primarily working-age Americans who aren't receiving a Social Security benefit, and, more importantly, they spend their money very differently than the 86% of Social Security beneficiaries who are aged 62 and above.
For instance, seniors spend a higher percentage of their total expenditures on medical care and shelter than the average American. But because the CPI-W is focused on the spending habits of mostly working-age Americans, shelter and medical care expenses aren't being given added weighting. The end result has been an estimated 36% loss in the purchasing power of Social Security income since January 2000. A 3.2% COLA in 2024 isn't going to make a dent in this ongoing problem.
The other source of disappointment is Medicare Part B premiums. Part B is the segment of Medicare that's responsible for outpatient services.
Most seniors aged 65 and up -- 65 is the traditional earliest qualifying age for Medicare -- have their Part B premium automatically deducted from their monthly Social Security check. In 2024, Medicare Part B premiums could rise by $10 to $15 per month. While the decline in Part B premiums for 2023 was rare, the expected increase in 2024 could gobble up most, or all, of the expected cost-of-living adjustment for lifetime low-earning workers.
